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Boeing Stock Can Be Lifted by a Relief Rally

Chris Lau

Boeing (NYSE:BA) stock is finding strong support at the $340 range but is in danger of falling below it. The company’s second-quarter earnings report did not make investors more confident in Boeing Co or Boeing  stock.

The crashes of Boeing’s new 737 MAX planes that occurred in Indonesia and Ethiopia continue to hurt BA stock. The company’s fair value is now more uncertain than ever after it reported a core operating loss. With the return of the 737 MAX uncertain, so is the outlook of Boeing Co. Still, investors should consider the merits of buying BA stock on weakness.

Weak Second-Quarter Results for Boeing Co

BOEING STOCK

Boeing reported a core operating loss of $5.82 per share, compared to positive earnings per share of $3.33 last year. It took a massive charge of $5.6 billion related to the Max’s problems, which lowered its EPS by $8.74.

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Its revenue from commercial airlines tumbled 54%, while the revenue of its Defense, Space and Security segment grew 8% and its Global Services revenue climbed 11%. The Global Services segment brought in revenue of $4.5 billion.

The Fallout From the MAX Issues

Boeing is trying to make the 737 MAX safer so that it can be used by airlines again. Though a number of airlines said they would cancel their orders of the plane, over 4,400 MAX planes are still on Boeing’s  backlog.

Moreover, BA is still winning new contracts for the MAX jets. For example, International Airlines Group ordered 200 of the jets.

Despite new orders, Boeing set aside the $5.6 billion mentioned earlier to reflect its estimate of potential concessions related to  the grounding of the the 737 MAX planes. Associated delivery delays have triggered costs that Boeing must account for. That will have a short-term negative impact on its cash flow. The longer the 737 MAX is grounded, the more charges Boeing will have.

Even though Boeing stock is down 22% from its 52-week highs, it is still 19% above its low of the last year. Many investors have been willing to bet that Boeing CO will resume production of the 737 MAX soon.


The Outlook of Boeing Stock

The safe return to service of the 737 MAX would be a positive catalyst for Boeing stock. But Boeing has other sources of growth. Its $390 billion backlog includes orders for freight planes from shippers DHL and FedEx (NYSE:FDX). In the Defense, Space and Security unit, Boeing has a backlog of $64 billion and orders worth $4 billion. Its Global Services segment has $4 billion of orders and a backlog of $20 billion.

On the balance sheet, Boeing added $4.5 billion to increase its liquidity. With cash and cash equivalents of $9.6 billion, Boeing Co has enough liquidity to work through its MAX challenges.

More on Boeing’s MAX 737

The MAX 737 grounding is a clear headwind for BA stock. On the positive side, management believes the plane may return to service early in Q4. In that scenario, Boeing thinks it may maintain its current production rate of 42 MAX planes per month. By 2020, it may increase its production rate to 57 per month. And although Boeing Co is working with regulators to gain certification for the revamped MAX, no one knows when the MAX will return to service.

The Bottom Line on Boeing Stock

Assuming BA’s revenue falls by about 10% in fiscal  2019 before rebounding in 2020, BA stock is undervalued by around 8% in a 5-year DCF Revenue Exit model (per finbox.io). Ultimately, in order to continue to own Boeing stock, investors must believe the company will win re-certification of the MAX within the next year. Investors can conservatively model a 15% drop in revenue this year followed by a strong rebound in FY 2020. After that, assume the company’s top line will increase by high single-digit-percentage levels.

Either way, the sooner production of the MAX planes resumes,, the sooner BA stock will begin a relief rally. Holding Boeing stock at these levels and waiting for that rally may pay off.

As of this writing, the author did not hold a position in any of the aforementioned securities.

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